Advice for fintech founders - how to work with law firms/compliance and move fast
I wrote this Twitter thread on working with lawyers a while ago but I think it deserves to be a post. It's important for fintech founders to understand and embrace legal and compliance function.
I've worked with 12-15 law firms over the past few years and spent over $2M on legal fees.
In talking to 100+ fintech founders, I’ve found that working with legal/compliance is alien to most. Founders are product builders and know how to work with engineers but not lawyers.
Managing regulatory and compliance counsel will be key to building a successful fintech startup.
**Most lawyers won't like my comments and many won't agree with this
But here we go:
An early-stage fintech founder's guide to working with lawyers.
Generally, founders have product or technology backgrounds. They get into fintech because they are looking to improve access to financial products, serve an underserved market, lower the cost of financial services, and broadly build an amazing product.
Most founders don’t realize that fintech is as much about regulations as it’s about technology.
To understand and innovate within a complex regulatory framework, they need to be creative. But they don’t have experience in legal or compliance.
A common early stage fintech startup situation:
As a new fintech startup - you promised an amazing customer experience, built a long waitlist, and raised a round.
Now you have to build and launch quickly.
Your first instinct is, let’s make a super compliant product.
But you don’t have expertise or experience in legal/compliance.
So you hire expensive lawyers.
You explain your innovative product.
They tell you it’s not been done before and it's risky.
Then they give you esoteric advice to reduce your liability.
This limits your innovation (value prop) and the customer experience feels more like that of a bank.
You still move forward and try to launch quickly.
But it’s delayed because of review cycles with external legal/compliance (engineering integrations are painful but straightforward).
The product is delayed by months and investors are getting impatient.
This situation is pretty common.
What to do in this scenario?
Step 1 is to make regulatory compliance one of the CEO's focus areas.
It’s more important than product or engineering.
CEOs shouldn’t treat it like finance/accounting.
There is no fintech company that was successful without great regulatory and compliance functions.
Some will argue that it’s the highest risk area and that’s why it's the most important function.
Brex and Stripe founders dug deep into regulatory and compliance details.
Had an office hour with John Collison a few years ago and he mentioned that hiring great counsel was crucial in building a great product.
Now, how to actually deal with lawyers:
It’s an art.
Not sure if there’s a science to it.
You need to develop a sense of when to listen to their advice and where to push back (or ignore).
Lawyers are very good at listing risks and making everything sound like a risk - how one small thing can blow up your business.
They are not being malicious, it’s just how their brains work.
This is how they think of their role - to limit a company's liability as much as possible.
They have to be able to claim that they disclosed all the risks.
But you have to avoid falling into the “everything is a legal risk” trap.
Lawyers are very good at sounding smart without helping your company make progress.
You have to make sure legal/compliance is giving advice appropriate to the stage of your company.
That they are helping with progress.
And the best lawyers do that.
They will reduce compliance risk with creative solutions and help you build a high quality product.
Ask these questions to yourself when hiring a law firm (or a lawyer):
Are they a legal paper pusher or do they actually understand the law?
Do they have deep experience in the specific area you need help?
Do they understand what the regulations (in your area) are trying to achieve? Can they explain it to you in simple words?
Have they ever found a creative solution to a regulatory requirement?
Have they made a product simpler compared to the norm (while complying with regulatory requirements)?
Are they asking you the right questions and suggesting solutions on the intro call?
Do you think they’ll help you make progress?
These are a few questions to start with.
Overall, dig deep into their experience before signing them on.
After you hire a law firm, how to get the most out of them (without slowing down progress):
Remember: you are in the driver's seat at all times. Even if you have a big ass lawyer on the other side and you don’t agree with their advice, you can always find a new bigger ass lawyer.
Never try to get a yes/no answer from lawyers. They will almost never do it.
Don’t outsource your thinking to lawyers. This is the biggest trap founders fall into.
Don’t let them dictate your product strategy.
Don’t let them scare/confuse you with a lot of “what-if” scenarios. You should know the most common use cases and the frequency of those use cases.
Ask them about the likelihood of different bad case scenarios, the probability of those scenarios happening, and potential resolution steps.
Also get as much clarity as possible on the worst case scenario - both in terms of probability and the extent of loss. Just so you know it.
Start with the simplest version of your product. Get a solid understanding of the base case ideal scenario. Then add unique elements and how they change the risk of your product.
Have a list of similar products or experiences being implemented by competitors or other companies. Ask lawyers how to achieve a similar experience.
Don’t let lawyers reinvent the wheel. All lawyers will give you 10 different reasons why everything needs to be done from scratch but that’s never the case.
The list goes on.
As a fintech startup CEO, you will need to think about the risks and make decisions with a high degree of uncertainty.
Regulatory compliance is one such area.
If a law firm isn’t helping you make progress, you can fire a law firm anytime you want.
There are many good law firms - don’t hire a bad one (which is even worse).
It takes a lot of courage as an inexperienced first-time CEO to not follow a lawyer’s advice. It goes against everything you’ve learned or have been advised.
Hope this helps.
Feel free to reach out through Twitter if you think I could be helpful.